What's Going To Happen To Mortgages Now? Everything You Need To Know

Mortgage rates do fluctuate with the government’s policies, but even after Monday’s huge U-turn, they aren’t expected to decrease just yet.

New chancellor Jeremy Hunt tried to undo the vast majority of Liz Truss’sdisastrous mini-budget in an effort to calm the markets.

And while gilt yields and the value of pound both reacted positively, the mortgage market seems to have gone in the other direction so far.

Here’s what you need to know.

How did mortgage rates react to the scrapping of the mini-budget?

There was a mixed reaction from mortgage rates in the immediate aftermath of Hunt’s announcement.

Some mortgage lenders started to withdraw their best deals shortly after the chancellor ripped up the majority of the mini-budget’s policies.

For instance, NatWest announced just after 4pm on Monday that the two-year fixed rate mortgages were going to increase by 0.4%, and all purchase, remortgage and first-time buyer deals would go up by 0.75%.

This means there was a substantial increase between mortgages agreed upon before the statement and the ones agreed upon afterwards.

But, there is also a belief that Hunt brought an end to the “panic mode” in the market, as L&C Mortgage Brokers told The Telegraph.

But that doesn’t mean the rates have actually declined just yet, despite early predictions from analysts suggesting that they would.

In fact, Martin Stewart, of London Money, warned The Times on Monday: “Anyone who wakes up tomorrow thinking we’re about back to where we were last September is kidding themselves.”

Why is this happening?

Essentially, Hunt’s announcement only lessened the problems facing the housing market, but did not fix them altogether.

Jamie Lennox, director at mortgage broker Dimora Mortgages, told Metro that there was already a substantial backlog of people applying for mortgages. This long list had built up in the weeks since the mini-budget was announced.

He said: “Backtracking isn’t going to help millions of mortgage customers who have already been left up the creek without a paddle.”

“Lenders are not simply going to lower interest rates overnight because they will drown with a further influx of applications,” he added.

What about interest rates and the Bank of England?

A mortgage interest rate is the amount of a loan that is charged to the person who is borrowing money from the bank, and it’s a percentage of the total amount borrowed.

But, as director of Shaw Financial Services also told the Metro: “Interest rates take the elevator up and take the stairs down.”

Data provider Moneyfacts also pointed out that the average rate on a two-year fixed deal actually increased from 4.74 to 6.47%, on Monday – the highest in 14 years.

The Bank of England controls interest rates, and has repeatedly signalled that to control the chaos in the economy (the 40-year-high inflation) these rates are likely to continue going up.

Hunt’s U-turn means government borrowing is now less expensive, which in turn means the Bank of England will have to raise interest rates by less than previously predicted.

But – inflationary pressures remain, so interest rates will still have to go up.

According to the Telegraph, investors now expect that the Bank of England will raise the bank rate by a whole percentage point, up to 3.25% on November 3 – less than after the mini-budget, but more than before Truss became PM.

So, what will it take for mortgage rates to decrease again?

David Hollingworth from L&C mortgage brokers told the Telegraph: “We need to see an appetite from lenders to be competitive.”

If lenders are willing to put more mortgage deals on the market again, they’ll have to compete more – pushing interest rates down.

Because so many lenders had withdrawn their offers from the market prior to Hunt’s announcement, the rates were expected to increase to nearly 6% up from around 2.25% – but it might be a while until more offers appear.

So, don’t expect large changes any time soon.

Hollingworth said: “We’re not talking about rates dropping back significantly, we’re talking about maybe some improvement in availability and a slight drop in rates. 

This is potentially just removing that panic and volatility. It doesn’t mean homeowners will have an easy ride.”

What might happen next?

Zoopla analysis found the number of people looking to buy homes has decreased by a fifth since the mini-budget.

But, since Hunt has kept the stamp duty cut in, which could also encourage existing homeowners to move, especially if they have to choose between relocating or remortgaging their current home.

Predictions from Bloomberg suggest interest rates will start to level off at around 5.25% by Spring next year.

But, that’s still very high, so any prospective home-buyers ought to speak to a broker to get advice from across the market, as it’s not always straightforward.

For instance, if lenders are offering cheaper mortgages rates in a five year deal for a fixed price compared to a two year deal, this may be because banks believe the market rates will come down over the medium term.